May 2005
Lecture
The Chinese Economic
Reform and Chinese
Entrepreneurship
http://www.uoc.edu/symposia/caixamanresa/
jornadaeconomia/2005/eng/vicky_hu.pdf
Vicky Hu
May 2005
Lecture
The Chinese Economic Reform and Chinese
Entrepreneurship
http://www.uoc.edu/symposia/caixamanresa/jornadaeconomia/2005/eng/vicky_hu.pdf
Vicky Hu
Abstract
In the last few years, China has had a spectacular economic development and has come to play an increasingly
important role in the world economy. For a long time, the Chinese economy was a centrally-planned economy in
which all companies were owned by the state. In 1978 China started an economic reform. In the beginning, in the
late 1970s and early 1980s, trade was opened to the outside world and the Contract Responsibilities System was
implemented in agriculture. By the end of the 1980s China had almost solved its food shortage problems. Around
1990 six special economic zones were established, including the Shanghai Pudong zone, which was a pioneer
attracting foreign capital.
The reforms of the late 1980s and early 1990s focused on the creation of a pricing system, which was achieved
using a dual track pricing system, and on decreasing the role of the state in resource allocations. Increasingly competitive sectors, such as distribution, were opened to private enterprise and foreign capital. Overall, the Chinese economic reform has been a spectacular economic success which has generated rapid economic growth over two
decades and the country has moved from a centrally planned economy towards a market economy, especially since
China became a member of the WTO. The reform has brought about an increase of industrialization, a higher population concentration in urban areas, and has solved the shortage problems.
Before the reform, all companies were state owned. In fact, there were no entrepreneurs. After 20 years of growth,
company ownership has experimented unprecedented changes. On the whole, non-state-owned companies can
now be more involved in sectors that used to be monopolized by state-owned companies. Except for the sectors of
electricity , telecommunications, oil and even the defence industry. Current Chinese entrepreneurs come from four
types of companies: state-owned companies, former state-owned companies turned into stock companies, private
companies, and foreign fund companies or joint-ventures. They are a new emergent class, which was difficult to
forecast; but, as Den Xiaoping said, “Be the cat white or be the cat black, it is the clever cat who will catch the
mouse.” Our goal is success.
In spite of background differences, Chinese entrepreneurs have many things in common. They are familiar with the
business situation in China and with Chinese culture. They are firm, resolute and persistent, and they are eager to
learn. They also have some flaws: Some lack training in marketing and business administration skills. Some are still
trying to learn how to set up a modern company instead of the old family business based on a craft industry.
The Chinese economy has started an era of change. Structural adjustments are needed and there are many issues to
solve. Among others: 1/ the economic growth model, from an extensive economy to an intensive one; from large
investment and high consumption of resources to a high technology model, high added value and low consumption
of resources. 2/ The distribution of mineral resources and the energy shortage. 3/ The environmental issues, like the
pollution of rivers. 4/ Exchange rate reform. 5/ Differences between the rich and the poor. 6/ Differences between
eastern and western China. 7/ Growth and peace. 8/ The creation of a harmonious society.
Keywords
entrepreneurs, Chinese economic reform, special economic zones, market, enterprise, problems in the Chinese
economy
© 2005 by Vicky Hu
© 2005 by Caixa Manresa and FUOC
2
May 2005
The Chinese Economic Reform and Chinese Entrepreneurship
Moderator
Li donaríem la paraula a Vicky perquè ens presenti la seva
empresa. [to Vicky] Vicky, you can go ahead.
Introduction
generate sufficient surplus value to finance the
modernization of the Chinese economy. The first reform in
the late 1970s and early 1980s consisted of opening trade to
the outside world, instituting the contract responsibilities
system in agriculture, by which farmers could sell their
surplus crops and place them on the market. We established
the Township-Village Enterprises.
Vicky Hu
Thanks a lot. First of all I would like to thank professor
Nueno and Caixa Manresa, who have given me this
opportunity to visit Barcelona and Spain again, as well as this
beautiful city. I am well aware that Manresa is another city.
I’m visiting this place for the first time, and would like to
take this opportunity to thank IESE and the CIBS. I’m very
proud to be a student of these two schools and to
participate in them, and proud also to be the wife of my
husband.
In this speech I will talk very little about my own
company, that is, the company that belongs to me and my
husband. When I was preparing this talk I realized that you
might be more interested in knowing more about the
Chinese economy instead of hearing about our company, so
maybe at some other time I will talk in more detail about it. I
will only mention a few basic facts about it. We established
it almost ten years go, and currently the total assets are
valued at US$ 0.5 billion. So it’s a small success. We invest in
different fields, including real estate, mineral resources and
high-tech. It’s a high-tech company that also includes wire
broadband communications.
The Chinese economy and its Chinese entrepreneurs,
which is what I will focus on now, is a fairly large topic. I will
divide it into three parts: the Chinese economic reform,
Chinese entrepreneurs and problems in the Chinese
economy.
Special Economic Zones
The Chinese Economic Reform
Assessing the Reform
First Steps
I believe that in general the Chinese economic reform has
been an economic success which has generated rapid
economic growth over two decades. In 2004 the GDP per
capita was US$ 1267. In Shanghai this figure reached US$
6671.
Industrialization,
open
organization
and
internationalization was the tendency that helped move
towards a market economy. In 2004 GDP increased by 9.5%
up to US$ 1.647 trillion, which makes China the sixth
biggest economic body in the world. Opening to the outside
remains essential to China’s development.
The history of the Chinese economic reform is a very large
topic which would take us all day, so I will only outline it
briefly. In recent years China has achieved a spectacular
success in its economic development, and little by little has
been playing an important role in the world economy.
In the recent past, the Chinese economy was based on
long-term centrally-planned system. From 1978 onwards,
China began an economic reform, whose goal was to
© 2005 by Vicky Hu
© 2005 by Caixa Manresa and FUOC
By the end of the 1980s China had almost solved its food
shortage problems. At the same time, China established
special economic zones, which included, as we all know, the
Shanghai Pudong zone, which has become the dragonhead
of the Chinese economy. The reforms of the late 1980s and
early 1990s focused on creating a pricing system. This was
finally achieved using a dual track pricing system and
increasing the role of the state in resource allocations. The
diversified enterprise ownership system emerged, followed
by more and more areas of the monopoly being open to
private business and foreign capital.
By the end of the 1980s China had
almost solved its food shortage
problems. At the same time, China
established special economic
zones.
The reforms of the late 1990s focused on closing
unprofitable enterprises and dealing with insolvency in the
banking system. At the start of the twenty-first century
there has been an increased focus on bridging the gap
between the rich and the poor. I have some boring figures
for you.
3
May 2005
The Chinese Economic Reform and Chinese Entrepreneurship
I believe that in general the
Chinese economic reform has been
an economic success which has
generated rapid economic growth
over two decades.
China continues to attract large investment inflows. By
the end of 2004 China had become the biggest FDI
developing country. In 2003 foreign fund and enterprises
produced about 45% of China’s exports. By comparison,
China’s imports and exports account for 5.3% and 5.8% of
the world’s, respectively. Foreign exchange, on the other
hand, totaled about US$ 609.9 billion in 2004. This
appeared in the IMF report of 2004. More than 20% of the
world increase in trade was contributed by China. China
emerged as the third biggest trade body, after the US and
the European Union.
China emerged as the third biggest
trade body, after the US and the
European Union.
So, over the past two decades of reform, the Chinese
economy has achieved world-shaking changes. The market,
this invisible hand, became a basic way of allocating
resources, while enterprises played a key role instead of
economic activities. In the past, before the China’s economic
reform, only the government played an important role in
activities. Now it is enterprises that do so. Since China’s
entry into WTO in 2001, the role of the Chinese central
government derived from spontaneous economic forces and
the conscious decision by reformers to replace direct central
government involvement with indirect labor in the market,
plus increased local decision-making.
In the past, before the China’s
economic reform, only the
government played an important
role in activities. Now it is
enterprises that do so.
The Chinese Entrepreneurs
Entrepreneurs Before the Economic Reform
The second point I want to talk about is the Chinese
entrepreneurs under the economic reform. Before the
© 2005 by Vicky Hu
© 2005 by Caixa Manresa and FUOC
Chinese economic reform all enterprises were owned by the
government in a planned economy framework. The heads
of the enterprises were designated by officials, not based on
performance, but on how lucky you were. They were not
efficient entrepreneurs. Following a gradual and on-going
shift from a planned economy to a market system,
unprecedented changes of ownership in enterprises were
carried out. Entrepreneurs, who constituted an emerging
class, were at the forefront of economic activities, and even
of political affairs. This would have been hard to imagine
under the planned economy system.
So, a new law called “the non-state-owned economies”
comprising 36 items was enacted in March 2004. There will
probably be more and more private businesses soon and
foreign capital will get involved in the monopoly industry,
for instance in the electricity sector, in financial services, the
banking industry, telecommunications, petroleum and even
in the defense industry.
Types of Chinese Entrepreneurs
Regarding current Chinese entrepreneurs, they mainly come
from four kinds of enterprises. The first is the state-owned
enterprise. In these kind of enterprises the entrepreneurs are
designated by a specific bureau which is called State
Property Managing Council. The entrepreneurs are not
shareholders of the enterprise. They only receive a salary
depending on their performance. Many went through the
shift from planned economy to market system, which means
they were acquainted with the specific cultural
characteristics of state-owned enterprises. Besides this, the
experts in professional skills as well as modern management
had an international vision.
In recent years, an elite that had studied in Europe,
including at places like IESE or Harvard, has started to
emerge, and the US holds an important position in large
state-owned enterprises. Recently, the first world-wide
recruitment of executives for large state-owned enterprises,
including the Bank of China in Hong Kong, has started to
embark on this cruise.
And the second part is the stock company, converted
from the state-owned company. These enterprises with
some percentage of shares retained by the government
were a better incentive system. The leaders who manage
these enterprises usually possess some shares. Of course,
this is done using a legal approach, including MBO. These
enterprises, including TCL, the company who bought
Thomson a short time ago, and which is famous in Europe,
4
May 2005
The Chinese Economic Reform and Chinese Entrepreneurship
and Lenovo which is a manufacturer of PCs which bought
IBM’s PC business recently. Also the China Container Group.
The third part is a private business, such as my company.
These kind of enterprises are market-oriented enterprises
right from the very start, as opposed to the state-owned
enterprises, which are excessively protected by the
government. Private businesses have had to face fiercer
competition and unfair initial conditions when applying for a
loan from the state-owned bank.
As we all know, almost all the banks are owned by the
Chinese government, but some stock banks have emerged
recently, which last year they created wide alliances to
operate with RMB businesses, but their volume is still very
small in comparison to the state-owned bank. Their function
is to help private businesses face competition and unfair
initial conditions in applying for loans, as well as helping
with policies, such as preferential tax and admittance to a
specific industry. Many have failed, but some have achieved
a great success.
In 2004 private businesses made history again. The
growth-rate of employment in private business was 1.5%,
which is 0.8% higher than the overall employment growth
rate. Private business accounts for more than 82% of noneservice industry. They have evolved into one of the pillars of
the economy. Among them are some companies you may
not be familiar with, as well as some new stars, which we
call the Chinese stars, which grabbed a window of
opportunity in the IT boom. Some were listed in Nasdaq
several years ago, including an online-gaming company.
They earn a lot of money.
The last kind of company is the foreign fund enterprise,
which includes joint ventures and wholly foreign-owned
enterprises. Chinese market-oriented reform has been
accompanied by a steady expansion of the country towards
the outside world. With an enormous quantity of foreign
capital pouring into China, a group of local talent has been
fostered. They combine professional skills with the
traditional Chinese character, and they have grown into the
backbone of Chinese entrepreneurship in the course of
enterprises taking root in China. Notwithstanding the
different backgrounds that Chinese entrepreneurs have,
they do share at present some common characteristics.
When we talk about the reason of China’s enormous
continuous rapid economic growth, among all the
prominent features we have to pay more attention to those
other countries do not possess, namely initial conditions. In
particular, structure characteristics, such as surplus, similarly
unlimited agricultural labor, and the potential domestic
market, which has been referred to as the primary cause of
growth. This together with policies and a high desire for
© 2005 by Vicky Hu
© 2005 by Caixa Manresa and FUOC
authority to create a regional economic jump, pushed the
Chinese economy ahead at a high growth-rate of 9%
annually.
Apart from these economic and political features, to
some extent the Chinese agriculture could be seen as the
cluster of cultures from different regions. This is similar to
how it is in Europe, that instead of it being a single country it
is a union of countries. We have many different regions and
almost forty nationalities, plus many different languages. In
some cases Chinese cannot understand other Chinese who
live just across the river. Understanding the diversity of
Chinese culture and the relationship between the central
government and local governments goes a long way to
understanding business in China.
Understanding the diversity of
Chinese culture and the
relationship between the central
government and local
governments goes a long way to
understanding business in China.
The core of an enterprise is human, which means that
the essence of management is how to motivate. Apart from
the institutional framework, an influential leader with a
strong character is crucial for building a company that lasts
long. This is especially true when facing drastic changes in
the social and economic system. I believe you need
persistence, integrity and perspective, as well as the risks
that are characteristic of all entrepreneurs worldwide. I
believe Chinese entrepreneurs are more courageous and
resolute, and they adore their work. Most of them see
entrepreneurship as a life-long responsibility and a pleasure.
This is why they have time to think more about how to
attain effective communication with the employees, besides
managing them by giving them the necessary recognition
within a sound system. I think Chinese entrepreneurs are
more eager to learn. They learn by experience and they
apply management innovation and technological
innovation. This is what we call experimenting. Some social
scientists call it pragmatism. Reform in China has been a
gradual adaptive process without clear blueprints. The
reason is that we don’t really know how we should do it,
and so have to rely on learning by doing. In the words of
Deng Xiao Ping, our great leader and designer of the reform,
it is like “crossing a river by feeling for stones”. So it is very
interesting. We have a very pragmatic saying, which is “Be
the cat white or be the cat black, it is the clever cat who will
catch the mouse.” So, success is our goal, regardless of the
approach.
5
May 2005
The Chinese Economic Reform and Chinese Entrepreneurship
The Flaws Chinese Entrepreneurs Share
Chinese entrepreneurs as a whole share some character
flaws. In general, the percentage of Chinese entrepreneurs
who are well educated is still small. There are few who have
worked in an internship in foreign enterprises, as this has
only been possible since the reform took place. Many do not
accept systematic training of management and the
acquisition of professional skills. Too many rely solely on
experience, rather than combining it with theoretical
analysis. For example, professor Pedro Nueno invited me to
this conference because I speak English. There are many
entrepreneurs who are much more successful than me, but
they cannot speak English. That’s the only shortcoming.
So, in part the Chinese market economy is immature,
although we have to bear in mind that it is only two decades
old and we will need more time for this Chinese marketoriented reform. Entrepreneurs have to face internal and
external challenges in the short term. China is not only a
country, but also part of the world. How should we use capital
market abroad? Or merchandise market? This is a big issue for
Chinese entrepreneurs. Four years ago we were talking about
the Chinese entering the WTO. I remember reading in the
press the headline: “The wolf is coming”, which I found funny.
This means we have to face more and more drastic challenges
from the outside, especially from the European Union and from
the United States. You are more powerful, and have more skills
in management and in the market than us, but in the short
term we have to face this; we have no choice.
The Chinese Economy
The last thing I want to talk about is the problems that
appeared in the Chinese economy during the transition to a
market-oriented economic system. China’s economic model
to some extent was a surplus plus shortage economy, instead
of shortage economy, throughout the central plan era. So, the
Chinese economic system is facing a structural issue.
Environmental Issues
On the other hand, China has environment concerns. We’d
like to shift China’s current energy mix from a heavy reliance
on coal, which accounts for 75% of China’s energy, towards
greater reliance on oil, renewable energy and nuclear power.
Since 1993 China has been a net importer of oil. Today,
imported oil accounts for 20% of the processed crude in
China. Net imports are expected to rise to 3.5 billion barrels
per day by 2010. A harmful byproduct of China’s rapid
© 2005 by Vicky Hu
© 2005 by Caixa Manresa and FUOC
industrial development has been increased pollution. Every
time we come to Europe we Chinese are impressed by your
clean and clear blue skies. Almost all our nation’s rivers are
polluted to some degree, and half of the population lacks
access to clean water. Fortunately, in recent years China has
strengthened its environmental legislation and made some
progress in stopping environmental deterioration.
A harmful byproduct of China’s
rapid industrial development has
been increased pollution. Every
time we come to Europe we
Chinese are impressed by your
clean and clear blue skies.
Exchange Rates
Another hot topic is the exchange rate. The exchange rate is
not only an internal issue but also an international one.
Regarding this issue, we need to resolve two problems:
Whether we need to adjust the fluctuating Yuan or just
revalue the RMB. From my point of view, the government
probably will do it in two steps. In one word, a stable and
flexible exchange rate system is essential for the economy. It
is the need for sovereignty. But also for the regional and
worldwide economy. To some extent, China achieved high
economic growth at a cost of income distribution. According
to the World Bank, the Gini coefficient of China was 0.403,
which is slightly above the internationally-recognized danger
level. Some relevant measures have been taken by the new
governments, such as abolishing agricultural tax to improve
farmers’ income which has helped narrow the gap between
rich and poor, who are then ones who pay. This is essential
for a stable system.
There are still a lot of obstacles that need to be overcome
on the way to a full Chinese reform. China is not only the
market of Chinese but also of the world. We believe the
problems that exist in the economy will finally be resolved.
At least we hope so and we believe so. That’s all. So thanks,
thanks very much, thanks again. [applause from audience].
Questions from the audience
Moderator
Thank you Vicky. I didn’t invite you because you could speak
English. I invited you because you show better the energy and
6
May 2005
The Chinese Economic Reform and Chinese Entrepreneurship
the potential of Chinese entrepreneurs and also because you
clearly show that it is possible to find friends in China. And by
the way, [takes out a newspaper] this is the China Daily of the
day before yesterday. So… [opens newspaper] There is a photo
of Rafael Nadal and a big article on him. There is a big article
here on gastronomy and it’s about Sánchez Romera who has a
restaurant in San Andrés de Llavaneres, as the article explains.
So, I thought that I was reading my favorite newspaper La
Vanguardia but it was Shanghai, so the world is flat.
Vicky, are there still opportunities in China? Tenim encara
oportunitats a Xina?
Shanghai. So, my suggestion is, if you want to get involved
in the Chinese market, the first step is maybe in Shanghai or
the area around Shanghai, rather than the internal areas in
China, because the gap between the regions in China is still
very huge. It’s much more complicated regarding regulations
and local government relationships.
Moderator
I a la Vicky li voldria preguntar que de debò sigui molt objectiva
i que ens digui tres raons de pes per invertir a Xina. Tres.
Vicky Hu
Vicky Hu
Do we have opportunities in China? Of course, I think that
the opportunities are always there, especially in China’s
economic system, and with the tendency to the globalization
in theory there’s always a lot of opportunity there. But the
most important thing is the potential domestic market. China
has a potential domestic market. We call it the effective
market, which means that China, as we all know, has a huge
population, but it doesn’t mean that the market is as large as
the size of the population. But, after so many years of growth,
the growth of the Chinese population has been growing
together with the growth of the economy. So, I think that
there is a potential domestic market that is waiting to get in.
So, I think there are a lot of opportunities.
And the second point is that China has his own
advantages, including the cost of labor, which is still much
lower than in Europe. So the best thing is if you have a
foreign-fund company that can benefit from this cost of
labor. Besides, Chinese culture always emphasizes the
education of its teenagers. We call this “talent pool”. This is
also an advantage for establishing a company in China,
because, as I said in my speech, this is what we call the
humanist essence of the company. I think there will be more
and more opportunities in China, but apart from these
opportunities with private businesses of local companies and
foreign fund companies we have to face more and more
challenges in China, because not all the cities and regions
are so developed and have an effective government as in
I have more than three strong reasons to invest in China. The
first one is the market itself, and secondly the cost. I mean the
cost of manufacturing the materials and the labor cost and the
true talent cost of local executives who are very familiar with
the regulations and the management skills and various other
skills. So, they earn much lower salaries than the Europeans. I
have a class mate who is also a student of professor Pedro
Nueno. We had dinner last night. Luis has a subsidiary in the
US. They have twelve factories in China, and all the heads of
the factories are local. So this could be the second reason,
right? And I will have to think about a third reason.
Bert
I will give you the answer: You can make big money there,
and that’s all that matters.
Vicky Hu
Big money is always the goal.
Related links
X Jornada d’Economia de Caixa Manresa
http:\\www.caixamanresa.es/jornadaeconomia
To cite this document, you could use the following reference:
HU, Vicky (2005). «The Chinese Economic of HD Biosciences Co.». In: X Jornada d’Economia de Caixa Manresa (2005: Manresa)
[article on line]. Caixa Manresa. [date of consulting: dd/mm/yy].
<http://www.uoc.edu/symposia/caixamanresa/jornadaeconomia/eng/vicky_hu.pdf>
© 2005 by Vicky Hu
© 2005 by Caixa Manresa and FUOC
7
May 2005
The Chinese Economic Reform and Chinese Entrepreneurship
Vicky Hu
President of HD Biosciences Co.
President of HD Biosciences Co., Ltd., Shangai, since 2002. CEO of the China Capital Investment Group Co. Ltd. (CCIG) since
1999. Former Managing Director of Shangai King City International Co, Ltd., Guangdong, (1997-2002). Operations Department Director of the Zhuhai International Trade Exhibition Group Co. Ltd., Guangdong, (1994-1996) and Marketing Department Assistant Director of Ocean Food Co. Ltd., Guangdong, (1990-1994).
© 2005 by Vicky Hu
© 2005 by Caixa Manresa and FUOC
8